Tightened Credit Terms Could Hurt Credit Scores

Building and properly managing your credit has always been very important.  It affects the interest rates you get on credit cards, home loans, and auto loans.  It also affects your capability to rent an apartment, get cell phone service or insurance.  Your credit is even used now in background checks for a new job.  The article below from Canice Choi shows just how important your credit and credit score are in the unstable economy we are experiencing.  Your ApprovalGUARD™ coach will help you learn about your credit, how to build it, and how to manage it so that you can capitalize on the best that credit can offer you.

By CANDICE CHOI 10.29.08, 1:30 PM ET

NEW YORK –

Don’t throw out that letter from your credit card company. It may be notifying you of a reeled in credit line, interest rate hike or even an account closure.

In this recessionary climate, credit card companies across the board are tightening the reins on card holders to minimize their exposure to risk. Such actions could hurt your credit score and, in turn, your ability to get an auto loan, mortgage or even another credit card. So heading into the holiday shopping season, make sure you’re aware of any changes to your credit card terms.

In coming weeks, for instance, American Express is instituting a broad-based interest rate hike of 2 to 3 percentage points on card holders. The hikes are the result of an expected rise in charge-offs, or balances written off as not being paid, the company said earlier this month.

Across the industry, credit card charge-off rates rose to 6.8 percent in August, a 48 percent jump from the same period last year. According to Moody’s Investors Service, it was the 20th consecutive year-over-year increase.

Moody’s expects charge-offs across the industry to continue rising into next year, eventually surpassing peak rates seen during past recessions.

Further pressuring credit card companies are new industry regulations set to be adopted by the Federal Reservelater this year. One proposed regulation, for instance, would ban credit card companies from raising interest rates on existing balances.

“The new regulations are going to hamstring (card companies’) ability to manage accounts the way they have in the past,” said John Ulzheimer, president of consumer education.

To protect your credit score through these times, keep these points in mind.

WHAT TRIGGERS A CHANGE

Even if you’re not doing anything differently, lenders may be clamping down on your account. That’s because credit card companies are re-evaluating their criteria, said Carol Kaplan, a spokeswoman for the American Bankers Association, an industry group.

In a robust economy, for instance, a $15,000 balance may not have triggered any alarms. Today, it may be reason for a higher rate or a lower credit line, Kaplan said.

Other reasons lenders may tweak terms include late payments, partial payments, exceeding credit limits – even if such behavior didn’t provoke changes before.

Not using your card often enough could also be cause for a change or even prompt the company to close the account.

“The bottom line is, card issuers are looking for a reason to say no. They’re going on defense and minimizing their exposure to risk,” said Greg McBride, senior analyst at Bankrate.com.

NEW REGULATIONS COMING

Credit card companies may also be changing terms to gird for new regulations set to be adopted by year’s end.

The Federal Reserve is still ironing out the details, but one proposal would ban companies from raising rates on existing balances; hikes could only be applied to future purchases.

“In some cases, we think lenders are taking the opportunity to raise rates now,” said Ruth Susswein, deputy director of national priorities for the advocacy group Consumer Action.

Another proposed regulation would prevent companies from punishing card holders for reasons unrelated to their account. Right now, companies can raise rates or lower limits based on information that shows up on credit reports, such as taking out new loans or defaults on other cards – whether or not such activity had an impact on your credit score.

Some credit card companies have already stopped engaging in such practices. This year, for instance, Chase stopped automatically raising customers’ interest rates when their credit scores declined. The company says the move wasn’t related to the upcoming regulations.

HOW TO PREVENT A CHANGE

One way to guard against toughened terms is to keep more than one credit card. That will give you the option to transfer balances or use other cards if one issuer takes action against you, said Ulzheimer of Credit.com. Checking your credit score periodically to make sure it’s clean can also help fend off unwanted changes. It’s also important to monitor to prevent identity theft.

Other measures you can take are obvious: Pay your bills on time and whittle down debt as much as possible.

NEGOTIATING BETTER TERMS

The first step is to read any mail from your credit card company. Notification of new terms may also be included in your monthly statement.

If your bank hits you with a higher interest rate, call and ask it to reconsider if you think the change is undeserved. Ask the customer service representative if he has the authority to make changes to your terms. If not, ask to speak to a supervisor who does, said the ABA’s Kaplan.

“Tell them how long you’ve been a customer for and explain what went wrong. You can achieve a lot just by calling and being reasonable,” she said.

If you’re not satisfied, you can always get rid of the card. Banks typically let customers pay off balances at their old rates, so long as they shut down the account.

If your account is being closed, think carefully before asking the issuer to re-evaluate the decision. That technically counts as an application for new credit and may end up hurting your credit score.

For those with great credit and low balances, remember that credit card companies are fighting to hold onto you so it may pay to shop around.

Credit Cards Could Trap College Kids!

Educating your children and young adults on credit and credit management should start when they are young. It’s much easier when they have someone to talk to, such as your ApprovalGUARD™ credit coach. One of the greatest gifts you can give your young adult children over 18 is a subscription to the ApprovalGUARD service.  ApprovalGUARD will provide your young adult with credit tips, articles, four credit reports per year, and a LIVE credit coach who can help to educate and guide him or her on how to properly build credit without making the common mistakes young people can make with credit.

Many students are already burdened with financial pressure because they are accruing credit card debt; in some cases over $7,000 worth of it. Increasingly, students are even going to college with credit card debt in tow. Twenty-one percent of college freshman get their first credit card in high school, and nearly 40% sign up for one in their first year at college. With the abundance of on-campus, mail, and Internet credit card offers giving low introductory rates, freebies, and bonus airline miles, it’s not surprising to find that according to a recent study 83% of all undergraduate college students have at least one credit card and carry an average balance of $2,327.   

To learn more about this topic got to www.approvalguard.com and see the article titled “Credit for Kids – Understanding How to Educate your Children.   Another great article on this very important topic published by Ray Martin and distributed by CBS News ONLINE  expands on the dangers of credit cards and credit knowldge for your college bound kids.

 

Marlin Brandt

Chief Operations Officer

iQual Corporation

 

If Misused, Could Lead To Big Problems After Graduation, Warns Ray Martin

NEW YORK, Sept. 12, 2007  (Distributed by CBS News ONLINE)

(CBS) Millions of young men and women are just starting a new year at college and, along with their schedules and dorm assignments, they’re getting credit card applications. Plenty of them. That, says resident Early Show financial adviser Ray Martin, can be very dangerous to their financial health down the line. So, Martin has an important lesson about handling credit responsibly, for students and their parents, alike.

Credit Cards on Campus

During the next several weeks, 17 million college students will arrive at college campuses across the nation. Many will be targeted by credit card marketing campaigns designed to sign them up for specific cards endorsed by their college. Many students will accept these offers and fall into what is known as “the college credit card trap.”

According to a national survey on the use of credit cards by college students conducted by the Nellie Mae Corporation, a leading provider of federal and private education loans, about 42 percent of college freshman have a credit card. But by the time they reach their final year of college, 91 percent of students have at least one credit card and the average number of credit cards owned is four per student. Forty-six percent of students reported that they obtained their first credit card in their freshman year. By the time students reach their senior year, they carry an average credit card balance of about $2,850. College students report direct mail solicitation as the primary source for selecting and signing up for a credit card.

Students’ Credit Cards

It’s reported that nearly every major college and university has a lucrative affinity relationship deal with a credit card company. These deals can pay millions of dollars, providing a source of steady income to the college in exchange for handing over valuable marketing rights to the credit card company. In most cases, the deals work like this: The credit card company pays a multi-million dollar royalty fee to the college in exchange for access to mailing lists of the students, faculty and alumni, and exclusive marketing privileges at athletic and other school events. In addition, the school is paid a fee for each student who signs up for a credit card, as well as a percentage of the amounts they charge on the card.

So it seems that as college students are signing up for credit cards and getting into debt, their schools are profiting from it. If this strikes you as a conflict of interest and just flat-out wrong, you are not alone. Urged by a chorus of consumer advocates, Congress plans to hold hearings on these practices later this year, to more closely examine the relationships between credit card companies and colleges and universities. Perhaps more colleges will use some of the revenue from these credit card deals to fund financial and debt management courses and require their college students to complete these courses before obtaining their credit cards!

So, what’s the message here? Should college students avoid credit cards altogether? That’s just not practical. But many students obtain a credit card without giving any thought to setting up a financial plan with limits on the total amount of debt they should get into. As a result, they often find themselves in an unmanageable situation, facing an unmanageable amount of debt after graduating from college.

The learning curve with credit cards is not difficult, but there is little room for trial and error, as making a mistake can have big consequences. Students need to learn to establish and use credit properly, and to develop a good credit history, before they graduate from college. Often, the first step in this process is getting and responsibly using a credit card, which is an important and valuable financial tool, when used correctly. But this can backfire, since having too many credit cards and late payments can ruin your credit rating. This can have long-term consequences, such as getting turned down for a car or home loan or, even worse, a job — many employers check credit reports and turn down applicants who have poor credit ratings.

Using Credit Cards Correctly in College

Every student who gets a credit card needs to understand this most basic and essential concept: Each time you use a credit card, you are borrowing money. The credit card company will charge you interest until you pay it back in full. Credit cards never give you more money to spend, they just delay when you have to pay, and can even significantly increase the cost of what you buy when it is charged on your credit card and interest begins to add up.

Do’s and Don’ts for Students Using Credit Cards in College:

Do Shop Around for the Best Cards: Many of the credit cards offered on college campuses are not always the best deals for students. The best credit cards to get have three key features: no annual fees, a reasonable interest rate (18 percent or lower), and online account management. If the credit card offered through the college’s affinity program does not have these features, students should check out Bankrate.com, lowcards.com, and creditcards.com, for lists of the credit cards available to students.

Do Make Payments on Time: Don’t mistakenly think it’s better to skip a few payments so you can save up to then pay off your card’s balance in full. To avoid having a late payment posted to your credit report, you must make at least the minimum payment each month, and it must be made on time. Students who make one or two late payments can see their credit scores plunge more quickly because their credit history is so short. Making late payments can also trigger universal default provisions, where credit card companies raise the interest rates on all of your cards, even if you make a late payment on only one card.

Do Pay More than the Minimum: There are two ways to pay off your balance on a credit card. Paying in full allows you to avoid interest charges on purchases, and paying over time will mean that you will carry a balance and will pay interest charges until your balance is paid in full. On a credit statement, there is a minimum payment that is the absolute minimum that you can pay without incurring a late payment fee and to keep your account current. The minimum payment amount typically includes all of the monthly interest and a small percentage of the balance due. At a very minimum, you should always pay two to three times the minimum payment to pay off your balance faster and to save money.

Don’t Use For Cash Advances: Credit cards can be used for cash advances, but you should do so as a very last resort — for example, you need an emergency car repair and the repair shop only takes cash. Using a credit card for cash advances will trigger additional cash advance fees. The typical cash advance fee is four percent of the cash advance amount. Also, the amount of your card’s balance that results from cash advances carries a higher interest rate than the rest of your balance.Another popular form of using a credit card to get cash is to charge the expenses for a group of friends and have your friends pay their portion of the costs in cash to you. The idea is that you will hold onto the cash and use it to pay for the items charged to your card. The problem is that cash they give you never finds its way to your credit card, because you quickly spend it. Now you are stuck with no cash and a large credit card balance, with additional interest charges.

Don’t Use for Tuition: About one-in-four college students report charging a portion of their tuition to their credit cards. This is clearly not a smart move, as credit cards come with higher interest rates and terms that are not as favorable as other education loan options. Students who need to borrow to pay for qualified tuition costs should instead use education loans, which come with lower interest rates, built-in deferment of payments, and money-saving consolidation programs to use to pay off these loans after graduation.Finally, parents need to understand that students can apply for credit cards without any parental permission. Parents who want to supervise students’ use of credit cards should never sign up as a joint owner with their student on a credit card: This is an invitation to credit problems and identity theft for both the parent and the student if a student’s credit card is lost or stolen. Parents who want to monitor students’ use of credit cards can get set up to receive duplicate statements or set up online access to view the account activity.